News has just surfaced in the past couple of days that struggling movie rental company Blockbuster has offered a billion dollars to buy out similarly struggling electronics retailer Circuit City, based here in Richmond.
Blockbuster executives claim it would uniquely position Circuit City, the number two electronics retailer in the United States, to have a more competitive retail concept. How? By pairing electronics and end-user content together, similar to the way the Apple Store does.
But on a personal note, I don’t know how Blockbuster can afford such a deal, seeing how much of a hit they’ve taken in the past few years with rivals such as Netflix undermining their business (although they do have their own service, Blockbuster Online, of which I’m a customer, and it’s better than Netflix if you ask me because you have the option of instant in-store exchange).
In my opinion, bringing these two companies together seems comparable to raising a flag on not just one sinking ship, but two. I’ll be really interested to see what happens if the deal ends up going through.
“Blockbuster Stumbles On Hostile Takeover” – via Business Week
Shares of Blockbuster Inc. plunged to an all-time low Monday after it announced a $1 billion-plus hostile takeover bid for No. 2 electronics retailer Circuit City Inc., earning it a downgrade from a BMO Capital Markets analyst. Shares of the Dallas-based movie rental chain lost 32 cents, or 10.2 percent, to close at $2.81 after falling to a new low of $2.52 earlier in the day. Jeffrey Logsdon said in a note to analysts that he was “uncomfortable” with the deal and said it has the potential to divert management attention and financial resources from its own recovery.
Shares of Blockbuster have lost more than half their value since trading at an annual high of $6.67 a year ago. The company has struggled to compete with online movie operators such as Netflix Inc., and Circuit City management has questioned whether Blockbuster can finance the deal. Logsdon lowered Blockbuster to “Market Perform” from “Outperform” and cut his nine- to 15-month price target to $3 from $5. The analyst said the buyout creates a “two-front war” as the company struggles with its own financial problems. He further criticized the deal, saying it would take nine to 12 months to close and another year after before any financial benefit is realized. Furthermore, Blockbuster will likely have to use equity to pay for the deal, which will further push the stock downward, he said. “We find it difficult to imagine that fighting what amounts to a two-front war will ultimately enhance value for (Blockbuster) shareholders,” Logsdon said.
On Monday, Blockbuster announced that it would go straight to shareholders and pay between $6 and $8 per share in cash for Circuit City after saying the struggling retailer had not responded to repeated offers. The deal values Circuit City between $1.01 billion and $1.35 billion, based on its 168.4 million outstanding shares as of Dec. 31. The offer adds a 25 percent to 67 percent premium on Circuit City shares, based on their $4.79 closing price on Feb. 15, the last trading day before Blockbuster made its offer. Shares of Circuit City, based in Richmond, Va., soared $1.07, or 27.4 percent, to close at $4.97.